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Monday, January 23, 2012

Gingrich's SS plan uses a marginal model and has a universal mandate

1/23/2012

On Saturday, GOP voters in South Carolina chose former House speaker Newt Gingrich as the best candidate to take on President Barack Obama in the November election contest.

One area where Gingrich will have difficulty debating the current President will be on an individual mandate for health insurance. Gingrich, like former candidate Hermann Cain, has consistently touted Chile’s Social Security system as the model of choice for replacing our current system.

However, what the former speaker has so far failed to address is that the system is essentially the Social Security equivalent of Obama’s health care plan. Gingrich told debate viewers that Chile’s system is “totally voluntary,” which, in fact, is totally inaccurate.

According to Jose Pinera, one of the architects of Chile’s pension system, the system mandates that all workers must contribute 10 percent of their income to government approved retirement accounts up to $250 per month.

Until 2008, only about two-thirds of Chileans were covered under the system. In order to address the massive gap of Chileans not receive retirement pension reforms were introduced that year that now requires the government to cover individuals who failed to contribute or can’t afford to contribute.

The government also has a “minimum guarantee” and if a retiree falls short of that guarantee the Chilean government will make sure the difference is covered.

In addition, the government heavily regulates the mandated insurance companies. Under those regulations the companies can not participate in any activity other than manage the fund and are required to maintain low risk portfolios.

Much of the architecture of Chile’s Social Security mandate is emulated by both Mitt Romney’s health care plan in Massachusetts and Obama’s national health care reforms.

If the Supreme Court rules the Affordable Health Care Acts mandate as unconstitutional it would be difficult for Gingrich, if elected President, to bring Chile’s Social Security model to the United States.

First of all, the system was reformed under Augusto Pinochet a dictator and the system has not worked very well. Even though it has an 'indivdual mandate," Only 60 per cent of Chileans are covered. As Wikipedia notes:

The performance of the Chilean pension funds is not very good compared with the performance of private pension funds of developed countries, but that performance is partly attributed to special factors.

Also the expected amount of benefits not only depends on the performance of pension funds but also on the amount of withdrawn administrative costs. The amount of administrative costs is considered a problem of the Chilean pension system.

The pension system was reformed again in the year 2008. Andrés Velasco, the leading economic adviser to the government, addressed the two main problems:

the coverage of the population

the amount of the administrative costs.

The reform follows a recommendation by the World Bank, who has found in the 1980 pension system a strong redistributive component at the expenses of low paid or occasionally unemployed workers. In other words, the wealthier Chileans were doing well under this system at the expense of the lower paid workers. Where have we seen that before?

Many Chilean workers have difficulties achieving the 20 years of contributions to at least qualify for minimum pension.

National programs like Medicare and Social Security are best left to the government because private enterprise has about twice the overhead to run a national program.

Government medicare overhead is about half of what the private Medicare Part D costs. One study showed that Medicare overhead is about 4.7 per cent while private medical insurance overhead in 14.8 per cent.

Another study showed that Medicare has about 5 per cent overhead whereas private insurance has 9 per cent.

During the working years prior to retirement, this difference in overhead can have a substantial effect on a retirement pension.

In the UK, its social security system was privatized when Margaret Thatcher was the prime Minister.

The results were poor and pensioners lost half of their savings under the privatized UK system due to downturns in the stock market. The UK advised people who opted for the private system to return to the government system called the State Earnings Related Pension (SERP).

In many respects, the UK experience with a privatized social security system is more germane to Americans than the Chilean example.